CFA: Day #3 – Vanguard, US Stock Market and Blockchains

From the 3rd day of the CFA Institute Annual Conference, Kenneth Brandborg, Associate partner, shares his insights and highlights the most important debates of the day.

By Kenneth Brandborg, Associate Partner | The 24th of May 2017, Philadelphia, USA

The Annual Conference reception

Tonight, the CFA will host the Annual Conference reception.  The reception is sponsored and is usually lavish in the most positive meaning of the word.  It is always a fun part of the conference.  It is where you meet more than half of all the people, you will meet during all three days at the conference.  I will give you an update on the evening in my next post.

Once again, it has been a very interesting day.  The top three topics from today are:

  1. Just because you are a senior of age, you can still be the sharpest mind in the room. John C. Bogle entered the industry in 1951.  He is 88 years old, and has a brilliant mind.  He presented his very relevant and up-to-date views of the world.  He is truly admirable.
  2. When comparing American to British presenters, there is clearly a cultural difference in the way they present. The British presenters with a background from Bank of England are without a doubt very skilled and professional, but they do not have the same level of “entertainment” as the Americans we have seen.
  3. No Blockchain revolution, but a lot of great ideas.


The war between active and passive management funds

First speaker today was Bogle.  As he said himself ‘I’m a small company guy. But giving investors the best deal buy far, seems a bit counterintuitive’.  For those who do not know; Bogle founded Vanguard.  Their funds own 7% of the US stock market.

This is very far from a small company.  His speech was a piece on the ongoing war between active and passive management of funds.  Bogle claims that we are far from having a problem, with only app. 30 % of the market owned by passive managers, there is plenty of room for active managers and a stable price discovery in the market.

Passive managers – although passive – should play an active ownership role.

He did however point out a couple of interesting points.  Passive managers – although passive – should play an active ownership role.  An active manager can sell a stock, if they are dissatisfied with a firm’s management, but passive managers cannot.  They need to engage and fix the issues.

I wonder what that will do to the fees, if that idea catches fire?

US stock market and a huge concentration risk

He also pointed to another problem: Vanguard, State Street and Black Rock own more than 20 % of the US stock market.

That possesses a huge concentration risk that is currently unattended.  He did not himself have a solution, but did call out to lawmakers to find proper solutions.  As most other key speakers, Bogle cited Keynes and Adam Smith – the witty reader might suggest that Bogle could have known the two.

There seems to be a trend, where everybody thinks that either one of the two renown economists already have given their relevant insights to this area of interest.  In that case, I must start reading the classics.

One funny observation: Bogle meant that investing in foreign stocks is irrelevant.

Since American companies have half their revenue from other markets, he meant that it gave all the exposure needed without the currency risk.  It did not even cross his mind, that there could be better companies at a better price outside the US?  That is truly an American mindset.


Risk management and regulation – and a new potential financial crisis

Next up was Sir Paul Tucker – no doubt that he is one of the big boys when it comes to risk management and regulation.  Paul Tucker’s statements about the financial environment caught my attention.

That is quite disturbing when you look at all the signs to a new potential crisis could be building up.

Firstly, he believed that if a financial crisis, like the one we had from ’07, would happen again within the next 10-20 years, then capitalism, as we know it, would be under a massive pressure from governments around the world.

That is quite disturbing when you look at all the signs to a new potential crisis could be building up. Hopefully, new regulation will prove its worth, and the banks will either survive or close in an orderly manner.

Bank equity and stable asset prices

His point as to why the crisis in ‘07 went so wrong was simple; Too little equity in the banks.

A market as small as the American sub-prime market, could only cause so much trouble because there was virtually no cushion in the capital structure of the banks.

Another great observation of his is that he finds it ridiculous to discuss stable asset prices if we have no idea what the ‘true’ interest level in the United States and Europe will be.  And with the current QE program, that could take a while.


Fintech and Blockchain

As I said in my first initial post before the conference kickoff, I wondered if CFA would have anything on Fintech.  They did.  There was a very interesting session on Blockchain.  It has a lot of potential uses in the financial sector.  But, there is still not much going on in the real world.  One very fine example is settlement of transactions.

My best guess is that it will be such a huge change in the financial market infrastructure.

We could have online settlement, with low cost and full transparency – leaving much of MiFID II obsolete. But we haven’t.  Why?

My best guess is that it will be such a huge change in the financial market infrastructure.

That means massive investments and a lot of very big companies agreeing on a lot of trivial things like protocol, share of payments, how to maintain and develop it, and so on. Though, it would be the smartest solution, my guess is that, it will not happen within the next decade or two.


By the way: I thought Blockchain was a new technology.  It is not.  It was invented in 1991.

I have colleagues that are younger than that.


You can read about Kenneth Brandborg’s initial thoughts and expectations, the conference kickoff, and the 2nd conference day here.

Kenneth Brandborg, Associate Partner

Kenneth, CFA charter holder, has worked in the financial sector since 2001 with focus on implementation and development of risk management, performance calculation and investment management systems.

Read more about Kenneth and our other CMP consultants here